House GOP Tax Overhaul Would Cut Capital Gains, Dividend Rates

House Ways and Means Committee Chairman Dave Camp (R., Mich.) presides over a hearing on Oct. 29, 2013 in Washington.

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The top Republican on the tax-writing House Ways and Means committee is developing a tax overhaul that would cut effective rates on most capital gains and dividends, according to people familiar with the plan, even as it is expected to trim breaks that benefit higher-income earners and establish a new surtax on them.

The plan would spur economic growth in the coming years, according to an analysis by the nonpartisan Joint Committee on Taxation. The plan’s sponsor, Rep. Dave Camp (R., Mich.), hopes its economic benefits will prompt support from lawmakers of both parties and the White House, and convince congressional leaders to take on the politically risky overhaul during 2014.

Mr. Camp is expected to unveil the plan this week.

While prospects for enactment appear dim at the moment, Mr. Camp’s plan could become a template for future efforts. The proposal could become a GOP rallying cry even sooner, though, as Republicans have been casting for more pro-growth policies to embrace as they head into the 2014 mid-term elections.

According to the JCT analysis, which was reviewed by The Wall Street Journal, the tax-overhaul plan would increase real GDP by as much as 1.5% to 1.6% a year over the 2014-2023 period.

That translates to as much as $3.4 trillion in additional GDP over a decade, according to a senior GOP aide familiar with the plan. Some of JCT’s economic models project less improvement, however.

The plan also could increase labor force participation and private-sector employment compared to present law, according to the analysis. That would translate to up to 1.8 million more private sector jobs, according to the aide.

Mr. Camp has promised to reduce the current seven individual income tax brackets to just two, of 10% and 25%, and his plan does that. Current individual rates range from 10% to 39.6%.

The Camp plan is also expected to reduce or eliminate a number of popular tax breaks, particularly for the wealthy and big businesses, in order to avoid costing the government money.

When higher economic growth from the plan is considered, it could actually raise as much as $700 billion in extra revenue, according to the analysis. But that doesn’t take into account some temporary tax provisions that have either expired recently or are set to expire in coming years. The cost of extending them could consume a large chunk of the extra revenue. Still, the extra money could foster bipartisan debate between Democrats who favor public investment and Republicans who want more rate-cutting and deficit reduction.

The plan’s provision for capital gains and dividends – while not its centerpiece – would amount to an effective tax reduction.

It would start by eliminating the current top rate of 20% on long-term capital gains and dividends. Capital gains and dividends would be taxed like ordinary wage income. But 40% would be excluded from income for tax purposes, meaning that taxpayers generally would see an effective rate cut on their investment income.

The exclusion – combined with lower tax rates – would tend to benefit lower-income people in particular, although the vast majority of investment income goes to higher earners.

The plan is expected to include a number of tax increases on higher-income earners, in part to help maintain their share of the long-term tax burden as Mr. Camp has promised. For example, the plan would establish a 10% surtax on high-income earners — couples earning $450,000 — that would apply to a broad swath of their income, including some sources that aren’t currently taxed, such as employer provided health care and tax-exempt bonds.

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